Capstone College and Career Advising

Saving up for college

March 25th, 2014 by

In an ideal world, you set up a college savings plan while your child was still in diapers, contributed to it faithfully, and managed it wisely.

But let’s be honest – life, with all its unexpected expenses, often gets in the way of saving. And although loans, grants, and scholarships may pick up much of the slack for many students, parents still need to be prepared to kick in what they can afford. My friends at Roseman Wealth Advisors in Tyler suggest families aim to save about 50 percent of the expected cost for each child.

Many families simply sock money away in regular savings accounts or the stock market, but the Roseman advisors suggest investigating special college savings accounts. Although there may be penalties if you don’t end up using these funds for education, you also stand to reap big tax benefits, helping your college nest egg grow larger.

529 plans: There are actually two kinds of tax-deferred 529 plans. College savings plans are similar to a 401k, except they are restricted to education expenses and can be used at any accredited school. Prepaid plans funnel your money toward pre-paying the costs of an in-state school, although you can usually switch them to a private or out-of-state college later.

With either plan, large contributions are allowed, sometimes as much as $300,000. Unlike some other plans, anyone can start this plan, with no income restrictions. The money grows tax-deferred, and as long as funds are used for approved expenses, there’s no tax on fund distributions either. Finally, if grandparents or others wish to contribute to a college fund, this is a great option, as they can contribute up to $140,000 per child without paying any gift tax.

Coverdell education plans: This is another tax-deferred plan, designed for families with moderate incomes. You may contribute up to $2,000 annually into a Coverdell plan, as long as your family income stays below a certain level. (The IRS has set that level at $110,000 for an individual and $220,000 for a couple.) The benefits? Again, the money grows tax-deferred, and distributions are not taxed as long as they go toward education expenses.

College savings bonds: Series EE and I U.S. Savings Bonds are an option for those with younger children, moderate incomes, and an aversion to risk. Unlike stock-based funds, the principal is guaranteed. Interest will be tax-exempt as long as the money is used for education and income guidelines are met. (Adjusted gross income at the time the bonds are redeemed must be below a certain amount; currently, that’s about $74,000 for individuals and $110,000 for couples.) These are intended as long-term investments, and if you cash them in after less than five years, you will forfeit some interest.